Types Of Savings Accounts – Which One Is Right For You?
There are so many different types of savings accounts out there, and not all of them are made the same.
In truth, a savings account is a great place to put your money when you aren’t sure what else to do with it. However, there are several types that you can open, each of which has various features, benefits, and drawbacks.
In this post, we’ll discuss the differences and similarities between the various types of savings accounts so that you can choose the best choice to help you meet your savings goals.
Let’s get started!
Why Should You Put Money in a Savings Account?
In days past, you might stash your money under your mattress if you wanted to keep it safe.
Now, however, most people recognize the risk of keeping lots of cash in their homes.
Plus, if you choose the right type of savings account, you not only benefit from having a safe place to stash your money but you can also get more from your dollar by taking advantage of interest.
If you hide $1,000 in your house, you’ll still have $1,000 after five years (of course, as long as nobody steals it!). However, if you were to put that same money in a high-yield savings account, you could gain several hundred dollars in interest – and that’s if you don’t contribute any more to the account.
Investing vs. Saving
When you’re deciding whether to put your money in a savings account or to invest it, you’ll want to consider a few basic questions.
First, do you have at least six months’ worth of expenses saved up for an emergency? If not, it’s wise to build an emergency fund before you start investing (putting your money in an accessible high yield savings account is a great place to start).
You might also want to consider your ultimate goal in putting money away. If you plan on using the money you are going to save in just a few years or less, then a savings account is wiser than investing. Investing involves putting money into a fluctuating market – good for the long term, but not so much for the short term.
What Types of Savings Accounts Are There?
Now that you know the benefits of opening and contributing to a savings account, let’s take a deeper dive into which types of savings accounts are out there.
Traditional Savings Accounts
A traditional savings account is one that can be opened either online or with a brick and mortar institution (like a bank or credit union).
Often, these types of savings accounts pay lower interest rates (sometimes as little as 0.01% APY, or annual percentage yield). Some charge a monthly fee for certain balances or just monthly maintenance fees.
The benefit of putting your money in these types of savings accounts?
For one, your money will be accessible whenever you need it. Also, you’ll be able to talk to a banker face-to-face if you need help with your account.
High-Yield Savings Accounts
High yield savings accounts have been growing in popularity over recent years especially compared to traditional savings accounts.
High yield savings accounts are generally available only through online banks. Don’t worry – they’re just as safe as brick and mortar banks as long as they are FDIC-insured.
Most of these online banks that offer high yield savings accounts do not have physical locations, though there are some exceptions. Capital One, for example, has high yield savings accounts that offer wonderful interest rates. You generally don’t need to maintain a minimum balance or have a certain starting deposit, either.
Money Market Accounts
A money market account is similar to a savings account in that it can be found at both online and brick-and-mortar banks. The best money market accounts, as with high yield savings accounts, are found online. They can pay higher interest rates and charge lower fees because their overhead operating expenses are much lower.
These savings accounts tend to have higher minimum deposits than savings accounts. However, money market savings accounts offer withdrawal ability in the form of paper checks or debit cards, making it easier for you to access your money. In this way, a money market account is very similar to a checking account.
Certificates of Deposits (CD)
A certificate of deposit is an excellent savings tool if you know you don’t need to be able to access your money quickly. With a CD, you’ll keep your money in an account for three months to five years. It has to stay there until the term ends.
Certificates of deposits generally come with fixed interest rates so as soon as you deposit your money, the interest rate is fixed. You usually won’t have to pay monthly service fees. Certificates of deposits can be opened at both online and brick-and-mortar banks.
Cash Management Accounts
Cash management accounts are like a hybrid of a savings account and a checking account. Generally, these are offered by online banks. The interest rates aren’t as high as what you might get with a high yield savings account but cash management accounts still offer better rates than traditional savings accounts.
Some cash management accounts offer features that allow you to invest money, too, making them more convenient for people who want to dip their toes in many different financial strategies.
Health Savings Accounts
There are some types of savings that can be incentivized, such as health savings accounts. A health savings account, or HSA, is designed for someone who has a high-deductible health insurance plan. You can get tax exemptions for qualified medical expenses.
Although there are limits to how much money you can contribute to an HSA – and obviously, the savings can only be used for medical expenses – you do get some pretty sweet tax benefits.
College Savings Accounts
Just as health savings accounts help with medical expenses, college savings accounts can be used as a tax-advantaged way to pay for college.
College savings accounts generally come in the form of 529 plans but these vary by state and there are multiple methods of saving money for college depending on where you live. Some 529 accounts cover just a small selection of expenses while others can pay for just about everything.
Retirement Savings Accounts
There are countless types of retirement savings accounts into which you can put your money. Some of the most common are 401(k) and Individual Retirement Accounts (IRAs). 401(k)s are tax-advantaged savings accounts offered through an employer while IRAs can be opened independent of an employer.
Of course, these aren’t your only options – there are plenty of other basic savings accounts that can be used to save money for retirement, too.
Jumbo Savings Accounts
Another type of savings account to consider is a jumbo savings account. These are relatively new and are ones that pay much higher interest rates in exchange for larger balances.
OFten, $100,000 is the threshold for what might be considered a jumbo savings account, but this varies depending on the bank. There are also jumbo money market accounts and jumbo certificates of deposits.
If you have this large amount of money to save, shop around for the best interest rates (and minimal monthly fees) to find the best option.
What Type of Savings Account Earns the Most Money?
When you’re trying to figure out which types of savings account will get you the best return on your “investment”, know that there’s not necessarily one right answer as multiple factors go into this decision.
However, for most people, a CD with a longer-term (five years or more) will give you the best interest rates. Therefore, it will earn the most money over that time.
That said, if you aren’t able to part with that money for a full five years, then you should choose a CD with a lower interest rate. You’ll get less money overall, but you can tap into your savings sooner.
The same goes for a money market account or high yield savings account. Again, these two options won’t give you super-high interest rates, but offer more flexibility in when and how you withdraw your cash.
And over the long, long term, investing in a specialty account like a Roth IRA will earn you the most money overall. Of course, there are plenty of restrictions with these unique types of accounts (as compared to regular savings account options) so you will want to choose wisely when deciding where to put your money.
A traditional, regular savings account at a brick-and-mortar bank will likely earn you the least money over time.
Which Savings Account is Right for Me?
As you can see, there are many types of savings accounts out there. There’s no one-size-fits-all account for everyone so it is important to do your research and find the type that works best with your goals.
In some cases, it makes the most sense to have your money in multiple types of savings accounts. That way, you can capitalize on the many benefits of all of them without putting all of your eggs into one basket, or so to speak. But that way may not be the best fit for you, which is why having options is beneficial. You can even check out some alternatives to savings accounts altogether if that better fits your needs.
The most important thing you can do?
Just start saving as soon as you can! Don’t put off your savings goals any further – even if you aren’t sure that you’ve found the right savings account for your needs, it’s a good idea to start saving early so that you can put your money to good use.
Whether you’re saving for a vacation, an emergency fund, or a home upgrade, you’re sure to find the perfect savings account for your needs. So start pinching those pennies now!